Credit scoring, while developed to take much of the guesswork and bias out of credit lending, has had its share of criticism.

The secrecy of the FICO scoring formula has caused creator Fair Isaacs to be hauled before Congress, and the U.S. Public Interest Research Group insists consumers ought to know for sure how scores are calculated and whether they’re discriminatory.

Though consumers can now obtain their own scores, the formula is still secret, hidden because it’s privately owned.

The insurance industry is often slammed because it uses FICO scores to determine the rates offered to clients.

“Insurance premiums should be based on the risk of an accident, not a consumer’s bill-paying record for other goods and services,” said Norma Garcia, a senior staff attorney at the Consumers Union.

The group used a recent Federal Trade Commission study that found minorities — primarily African-Americans and Latinos — were substantially overrepresented among consumers with the lowest credit scores. As a result, the FTC found, they paid more on average for insurance coverage than nonminorities.

Conversely, a 2004 analysis by the Texas Department of Insurance found the average loss per vehicle for people with bad credit scores was double that of people with very good scores.

Additionally, it found that people with the best scores had 40 percent fewer accidents and that claims by those with poor scores were three times higher.

“Insurers simply want to use the most accurate, statistically valid tools available,” said June Holmes, interim chief executive of the Property Casualty Insurers Association of America.

“Credit information has proved to be one of the best predictors of loss.”

David is a member of the Investigations Team and has been at The Denver Post since 1999. He was a founding member of the team before writing about banking, finance, human services, consumer affairs, and business investigations. He has also worked at newspapers in New York, St. Louis and Detroit over a 35-year career that began at The Post.

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